The central bank is changing the colors of the 200, 500 and 1,000 naira bills, and the new bills will begin circulating on December 15. The hope is that when people give up their old bills, many people will choose this moment to switch to making electronic payments through a bank account for their day-to-day finances.
2. What difference would that make?
It is more difficult for the central bank to do its job when an estimated 85% of local currency does not go through the banking system and well over 90% of transactions are made with cash. Announcing the currency move in October, Bank Governor Godwin Emefiele said it would help control runaway inflation. It could also reduce corruption and organized crime. The country has a thriving kidnapping industry, with thousands of Nigerians kidnapped by bandits each year, with relatives often paying cash to secure their release.
Cash in circulation has more than doubled to 3.23 trillion naira since 2015. Nevertheless, almost half of the 220 million inhabitants do not have a bank account. Nigeria has just 4.5 bank branches per 100,000 people, one of the lowest rates in the world. The risk is that banks will be swamped with new customers trying to open accounts to deposit their old cash as the deadline approaches.
4. What are the banks doing?
They have launched advertising campaigns and hired 1.4 million agents to swarm markets and rural areas to encourage people to open accounts hoping to avoid a last-minute rush. The central bank suspended fees for bank cash deposits and ordered lenders to open their branches on Saturdays to encourage people to give up their old banknotes.
5. How did Nigerians react?
Many rushed to buy dollars, leading to a temporary shortage of the US currency and briefly sending the naira to a record low on the black market. Finance Minister Zainab Ahmed has questioned the policy, arguing it could weaken the currency and slow economic growth. But it was backed by President Muhammadu Buhari, who backed it as a way to fight corruption. Grain and gold traders in the northern city of Kano have said their business is booming as some people try to stay off the authorities’ radar by converting cash into hard assets.
6. What is India’s experience?
India implemented a similar demonetization policy, forcing farmers to trek for miles to exchange their old banknotes. The move led to cash shortages, long lines at banks and post offices, and a slowdown in economic activity. It has largely failed to reduce the amount of cash circulating outside the banking system or to prevent corruption. Emefiele insisted Nigeria could escape India’s fate as banks have taken steps to ease the distribution of the new notes and expand access to banking services.
–Assisted by Mike Cohen.
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